Soon after the pandemic hit in 2020, governments across the world provided support schemes to help companies through the overnight disruption in trade. At the same time, states lifted obligations to file for insolvency even if a company couldn’t pay its creditors. Viable businesses suffering from temporary problems, such as the closure of non-essential stores, received much-needed funds to see them through until Covid-related restrictions were eased. However, the schemes also provided financial help for companies that would not be able to recover from the pandemic or would otherwise naturally have become insolvent due to changing consumer patterns and other factors. Now that global markets are rebuilding and state support schemes are coming to an end, we may soon see mass insolvencies from so-called “zombie companies”.
A zombie company is a business that generates cash, but is so indebted that it can only pay off its fixed costs and interests, and not the debt itself. In the context of Covid-19, we’re seeing fragile businesses accumulating more and more debt thanks to ongoing low interest rates on loans. Even though these companies are technically still trading, it’s not enough to cover their debt once it has to be paid back and in reality, they’re already insolvent.
Identifying a potential zombie takes expert risk assessment, but there are a few simple warning signs to look out for. Beware if:
• The company can’t cover its interest costs twice over with the last year’s earnings before taxes
• Its one-year and average three-year sales growth is less than 3%
• Its vision relies on outdated products or distribution channels
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